Economist Mark Zandi told GOVERNING's Outlook conference that GDP is growing, but that doesn't mean state and local governments will be able to increase expenditures.

At least 2.5 million private-sector jobs will be created this year, reducing the country’s unemployment rate from 9.4 percent to 9 percent by the end of 2011, economist Mark Zandi said at GOVERNING’s Outlook in the States & Localities conference Wednesday.

Zandi, founder of Moody’s Economy.com, said he is optimistic about the future of the economy and predicted that the country’s gross domestic product would grow by 4 percent annually in 2011 and 2012.

American businesses are becoming more profitable and have shown signs lately that they are increasingly willing to hire to employees. By the end of 2012, unemployment will likely be less than 8 percent, according to Zandi. “The nightmare of the great recession is fading with each passing day. It doesn’t’ have the same kind of sting it did a year ago,” Zandi said.

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Recent tax changes that encourage business investment will bode will for hiring, Zandi said. Uncertainty about legislation such as health care reform, financial reform and a tax package has been abated now that those bills have become law. Since Congress has made decisions about those issues following much uncertainty, businesses are no longer in a holding pattern waiting to see how legislative decisions will affect them. That should also have a positive effect on hiring.

But state and local governments, Zandi said, will continue to experience financial struggles. Assuming that they experience 6 percent annual revenue growth this fiscal year and next fiscal year – which may be optimistic – state and local governments won’t be able to afford any growth in their nominal spending. Because of inflation, that would mean their purchasing power would be diminished, and they’d essentially have to reduce spending.

Still, from a consumer standpoint, the country is starting to right the wrongs that led it into a debt crisis. The number of credit cards outstanding is dropping, and delinquency rates on all forms of debt – from credit cards to student loans to cars – is declining. “All the preconditions for a better economy are now in place,” Zandi said.

Zandi also dismissed recent speculation in the media about potential municipal and state bond defaults. The risk of that happening, Zandi said, is virtually nonexistent.

Challenges still remain. The country won’t return to full employment until 2014 or 2015, Zandi said.

About 2 million homes are in foreclosure, and another 2 million are more than 90 days delinquent and face imminent foreclosure. About 14 million homeowners are underwater – they owe more money on their mortgage than their home is worth – and that number is growing. Meanwhile, housing prices have already fallen 30 percent from their peak; and Zandi predicted they could fall another 5 percent.